The present invention relates generally to inventory management systems and processes at the retail, wholesale and/or distributor level. In particular, the present invention involves a system, method and article of manufacture that optimizes inventory and merchandising shelf space utilization based upon cost and lost sales, with or without considering physical space constraints.
As will be understood by those skilled in the art, efficient inventory control is a critical ingredient in the success or failure of many businesses. As a primary cost of business is often inventory maintained at a business facility, it is important that inventory levels and control be handled in a cost effective manner. Successful operations typically generate a positive return on their investment in such inventory with higher sales or fewer lost sales. Thus, methods of controlling inventory are of critical importance to a business enterprise.
Inventory control methods may be broadly categorized as either reactionary or preemptive. In the preemptive category, an inventory control person or manager (i.e., store managers, parts managers, quartermasters, comptrollers, controllers, chief financial officers, or other persons charged with maintaining inventory) tries to anticipate demand based on known criteria (i.e., changing seasons, approaching holidays, etc.). In the reactionary category, the inventory manager reacts to perceived shortages of existing inventory to address demand. The latter technique is typically employed by many retail businesses in daily operation.
Current replenishment models are centered on providing order quantities which simply offer a probability of being in stock during the replenishment cycle, but do not take into account the sum of holding costs and the cost of lost sales due to stock outs. These systems project demand and store order quantities, but offer little or no insight into tradeoffs associated with the cost of carrying the inventory and the cost of stocking outs.
Determining the quantities of product to carry on the shelf (facings) is typically a totally separate process from replenishment methods, and rule-of-thumb principles are often used to determine numbers of facings for products. Such heuristics consider product packaging practices, shelf days of supply, retailer shelving practices, or perhaps productivity measures such as profit per square foot, but none take into account both expected inventory holding costs and the expected cost of lost sales.
Several methods for measuring the perceived shortages of inventory have been developed.
For example, U.S. Pat. No. 5,608,621, to Caveney et al. entitled System and Method for Controlling the Number of Units of Parts in an Inventory discusses a system for inventory management. The goal of the system is to optimize inventory based upon a selected inventory investment or service level constraint. In other words, this system optimizes inventory based on either a limited quantity of money or a time period for reordering parts during shortages.
Others have also addressed inventory control. Examples of general relevance include Baker, R. C. and Timothy L. Urban (1988). A Deterministic Inventory System with an Inventory-Level-Dependent Demand Rate,@ Journal of the Operational Research Society, 39(9): 823-831; Corstjens, Marcel and Peter Doyle (1981). A Model for Optimizing Retail Space Allocations,@ Management Science, 27(7): 822-833; Urban, Glen L. (1969). A Mathematical Modeling Approach to Product Line Decisions,@ Journal of Marketing Research, 6(1): 40-47; and, Urban, Timothy L. (1998). An Inventory-Theoretic Approach to Product Assortment and Shelf-Space Allocation,@ Journal of Retailing, 74(1): 15-35. The approaches proposed by these authors are of general relevance.
Another approach to inventory management called facing optimization minimizes inventory based on the sum of expected annual inventory holding cost and expected annual cost of lost sales. Inventory holding costs are primarily the opportunity cost associated with having a dollar invested in inventory instead of some other alternative. Inventory holding costs also include other variable costs associated with holding inventory. The expected annual cost of lost sales include the costs associated with shortages or outages of a particular item.
As more space or facings are given to a particular item or stock-keeping-unit (a.k.a., SKU), the inventory of the SKU increases as does the physical space required to store the SKU in the facility (i.e., the shelf, warehouse space, etc.). Also, as the inventory of a particular SKU increases, the probability of a shortage or stockout during a given period of time decreases but the required annual shelf inventory level increases. Lower stockout probabilities translate into lower expected annual cost of lost sales. In a space-unconstrained environment, it would be optimal to select the number of facings that minimizes the expected annual cost of lost sales plus the expected annual inventory holding cost. However, in most cases there is a fixed amount of space available for inventory. Consequently, it is necessary to find the number of facings for each SKU that minimizes the total cost of expected annual cost of lost sales and expected annual inventory holding cost for all SKUs in total.
Thus, a need exists for an improved inventory control system. In particular, an improved system that minimizes inventory based on the sum of expected annual inventory holding cost and expected annual cost of lost sales would be desirable.
The present invention addresses the above referenced need. In an exemplary embodiment, the system includes a bank of memory, a processor, an input and an output, and a computer program. The system optimizes inventory or store facings using various data and extrapolated computations. The system optimizes inventory using facing optimization. As mentioned previously, facing optimization is an approach to shelf inventory management that minimizes the sum of expected annual cost of lost sales and expected annual inventory holding cost.
The process of facing optimization requires the assimilation of relevant data for each particular item to be evaluated. The data to be collected include store-level point-of-sale (a.k.a., POS) data, frequency of shelf replenishment, shelf-level order cycle time, space available, space required per SKU, number of units per facing, cost to the retailer of one unit of SKU, price they sell it for, the inventory holding cost factor, and the unit cost of a lost sale. Store-level POS is used to measure the mean of daily sales and the variability of daily sales (a.k.a., standard deviation of demand). The system evaluates these variables when determining the optimal solution for an unconstrained space or a constrained space of a particular facility.
In another exemplary embodiment, the present invention also further evaluates the cost of a shortage or stockout per unit. When determining the cost of a stockout, the system may utilize either a default value or another value set by the user. The potential values that may be set by the user can represent historical costs or possible consumer reactions to the shortage (including switching to different leaving the store, shopping there less frequently, or never shopping there again). The percentage of customers who take each of these actions can be determined by marketing research or through logical discourse or through archival data. The default can be the margin of the item to approximate the unit cost of a lost sale.
In yet another exemplary embodiment, the present invention also evaluates sales variability. This variable can be important if two SKUs have the same days-of-supply (a.k.a., DOS, calculated by taking the inventory level and dividing it by the volume of sales per day) on the shelf. The SKU with the higher sales variability will have a higher probability of stockout.
In yet another exemplary embodiment, the system may be used to calculate the average daily demand for items with demand that is dependent on the number of facings for efficient assortment.
Thus, a principal object of the present invention is to provide an improved system for optimizing and controlling inventory.
A basic object of the present invention is to provide an inventory optimization system that optimizes inventory using facing optimization.
Another basic object of the present invention is to provide an inventory optimization system that minimizes the sum of expected annual cost of lost sales and expected annual inventory holding cost.
Another object of the present invention is to provide a system that evaluates the cost of a shortage when determining optimal inventory.
Yet another object of the present invention is to provide a system that optimizes inventory for an unconstrained space.
Yet another object of the present invention is to provide a system that optimizes inventory for a constrained space.
An object of the present invention is to provide an inventory optimization system that evaluates sales variability.
Another basic object of the present invention is to provide a facing optimization system that can also be utilized to evaluate new products and/or remove existing products from inventory.